Economic Rigor

I have been doing some analysis of the ASX All Ordinaries to value some bank stocks recently ( particularly NAB which has released it's results). But to value stocks, generally you want to know what the ROE is so you can discount the future cash flows. ROE is generally found by using the CAPM (or the Capital Asset Pricing Model). This is of the form R = rf + Beta(rm- rf ) where rf = Risk free rate (generally 10 year government bond rate) and Beta (the correlation between the return of the Asset you are looking at and the return on the market). rm- rf is generally known as the market risk premium. Now a lot of this info is available at Yahoo finance/Google Finance, but I always like to check the stats myself to ensure it is correct. Using OLS regression with ALLORD returns VS NAB monthly returns annualised (from Yahoo Finance), we find the Beta of NAB is 0.36 (fairly low risk). Risk free rate ( Aus Govt 10 year bond) at the moment is 0.038. All that is left is to calculate...

Looks like my model isn't too bad after all! Still one swallow does not make a summer and all that. Highlights from the Reserve Bank seem to indicate 1. US and China going ok 2. Europe has improved, but still on death watch 3. Australian GDP growth close to trend. 4. Commodity prices still high (but my model indicates this is negatively correlated to interest rates..might need to investigate this. Might be some multicollinearity in my model) 5. Inflation not a problem 6. Unemployment flat 7. Credit Growth slowly increasing, but retail rates close to long run average 8. Housing prices stable 9. Terms of trade down, but Australian dollar still high.

I have been doing some modelling to determine if I can accurately predict the Reserve Banks intentions regarding the cash rate. Based on Historical time series data, I have come up with the following factors that affect interest rates :- 1. 1 month lag in change of difference between 10 year bond and indexed bond (increase puts positive pressure on interest rates) 2. 2 month lag in change of difference between 10 year bond and indexed bond (increase puts positive pressure on interest rates) 3. Previous two Reserve Bank decisions on Interest rates (increase puts positive pressure on interest rates) 4. Commodity prices (increase puts negative pressure on interest rates) 5. Unemployment (increase puts negative pressure on interest rates) Based on todays data, while there was an decrease in Interest rates last December by the reserve, the fact that the last two months spread change on Government bonds vs index bonds were both "+" and commodity prices have been decreasing and unem...

I have been doing a few "back of the envelope" calculations on the Facebook IPO . At the moment, details are a bit sparse vis a vis the price of shares and the number of shares to be issued in the IPO . All we really know is that the total value of the shares in the IPO will be US$5,000,000,000 (5 billion). So how do we value the company based on this info? By making some assumptions. Note: In this valuation, we will be making some early assumption about the IPO (which may change). So watch these pages in the future as I will update as more info is released to the SEC. First Assumption - Book Value will be doubled after IPO . One thing that stands out about the Facebook SEC filing is that the current book value of the company at 31/12/2011 is roughly the same size as the total value of the IPO . (Book Value of company,or net assets = $4,899,000,000) So I believe that the investment bank assigned to float the company will be looking to double the size of the business. Th...